Headcount was 2,985 at the end of 2012, compared to 2,373 at the
end of 2011. Included in the increase are 312 employees who joined
the group with the acquisition of Alterian on 27 January 2012.
Headcount growth was aligned with expanding areas of the business.
Employee related costs remain the most significant component of
group costs, amounting to 68% of group overheads (2011: 71%).
Intangible assets ascribed to certain of the Group's software
and customer relationships arising from acquisitions are amortised
between 5 and 15 years and the carrying value is formally reviewed
on an annual basis to assess whether there are indicators of
impairment. The intangible asset amortisation charge in 2012 was
GBP8.1 million (2011: GBP5.9 million). The increase is caused by 11
months amortisation of the new Alterian intangible asset during the
period. Intangible assets and goodwill were allocated to four
existing Cash Generating Units ("CGU") namely Language Services,
Language Technologies, Web Content Management and Structured
Content Management and a new fifth CGU, Campaign Management,
Analytics & Social Intelligence, following the Alterian
acquisition. The 2012 impairment review did not result in
impairment to any of the CGUs.
Operating Margin
The operating margin, or PBTA margin (profit before tax and
amortisation of intangibles divided by revenue, or PBTA %) was
13.2% (2011: 17.3%).
At group level, PBTA margin was diluted by the acquired Alterian
business, which contributed 8% before acquisition and other one-off
costs. This improved dilution position is due to a combination of
cost savings, resilient web support and maintenance revenue, and
professional services demands.
Excluding Alterian, acquisition related one-off costs and
Language Weaver, which has continued to attract strategic
investment in 2012, Group operating margin was 15.7% (2011: 18.9%).
The reduction is due to a more cautious view of
percentage-of-completion and cost-to-complete of certain services
contracts in the second half of the financial year, and a weaker
performance in Technology.
Profit before tax and amortisation (PBTA), a primary measure
used externally by the investment community, was GBP35.5 million
(2011: GBP39.7 million).
Earnings Per Share
Earnings Per Share when adjusted for amortisation of intangibles
decreased by 9% to 33.77 pence. The deferred tax benefit associated
with the amortisation of the intangible fixed assets of GBP 1.9
million (2011: GBP1.6 million) has been adjusted in this
calculation of EPS. Basic earnings per share was 26.12 pence (2011:
32.72 pence).
Financing Costs
Interest costs in 2012 amounted to GBP0.3 million (2011: income
of GBP0.2 million). The increase was attributable to drawing the
Group's GBP20m borrowing facility to partly fund the Alterian
acquisition, and GBP2 million of a new GBP7 million overdraft
facility that was put in place at the time of the acquisition to
replace Alterian's drawn overdraft facilities.
In addition, there was a nominal finance lease interest expense
associated with assets acquired with Language Weaver in 2010 and
Alterian Inc in 2012.
Infrastructure and acquisition integration
SDL has strong core systems and processes which allow us to
service our clients effectively and maintain standards of internal
control. When opening new sites or integrating a new acquisition,
core systems and processes are implemented as soon as practicable
with appropriate training to promulgate best practice around the
Group.
During the period, Alterian was integrated according to
established practice.
Capital Structure
2012 2011
GBP'000 GBP'000
Net (cash) (6,262) (70,408)
Capital employed 227,764 217,832
--------- ---------
221,502 147,424
--------- ---------
Cash flow
Cash flow from operations was GBP17.5 million (2011: GBP32.6
million). Profit to cash conversion decreased, due to the expected
reduction in acquired Alterian creditors as overdue trade balances
were settled, deal transaction costs were paid and deferred income
associated with old non-renewing customer contracts was not
replaced. The underlying cash generation of the Group excluding
non-recurring items remains strong.
Borrowing Facilities
The Group has a committed GBP20m facility to February 2014,
which was drawn down in January 2012 to partly fund the Alterian
acquisition and remained outstanding at December 2012.
Additionally, a GBP7m overdraft facility to March 2013 was put
in place at the time of the acquisition to replace Alterian's drawn
overdraft facility, of which GBP2 million was drawn down and
remained outstanding at December 2012. This was repaid in full
during January 2013.
Further facilities if required will be put in place in the
future.
The Board remains of the opinion that operating with low levels
of debt is appropriate in the current economic environment, whilst
maintaining sufficient debt facility headroom to finance normal
investment activities. The Board believes the strong underlying
cash generation of the business will allow repayment of the
facility prior to the end of the facility agreement.
Impact of Acquisitions
The Board continues to invest in Research and Development
relating to recent acquisitions, with a strong emphasis towards new
technologies including machine translation where the strategic
opportunity is significant.
Language Weaver continues to dilute earnings in 2012 following
planned investments in the period.
The acquisition of Alterian in January 2012 is marginally
earnings accretive in the period, ahead of baseline assumptions due
to operational cost upsides and stronger demand for professional
services in the Web business. This acquisition brings leading
marketing analytics, campaign management and social intelligence
technologies to SDL. The opportunity to position SDL technologies
as a complete Customer Experience Management (CxM) solution is
compelling, and the Board has decided to invest in a Consulting-led
client engagement team in 2013 to accelerate the CxM
opportunity.
The Board will continue to assess acquisition opportunities in
the marketplace, which enable the business to accelerate its
development of a compelling and uniquely differentiated Customer
Experience Management proposition to best serve our global
clients.
Derivatives and other Financial Instruments
The Group has cash and short-term deposits of varying durations
to fund its working capital needs and other financial assets and
liabilities such as trade debtors and trade creditors arising
directly from its operations. The Group's policy continued to be
that no active trading in financial instruments will be undertaken
within the operating units and all decisions on use of financial
instruments will be taken at Group level under the direction of the
Chief Financial Officer.
Pricing of the current GBP20 million borrowing facility is a
0.85% to 1.40% margin on London (or equivalent) Interbank Market
rates according to the advance date. Which rate applies between the
0.85% - 1.4% margin is dependent on the net borrowings to EBITDA
ratio of the Group on the date of the advance. Under the credit
facility agreement, SDL is subject to certain financial covenants
which are required to be continually monitored. These covenants
relate to EBITA: Borrowing Costs; Net Cash Flow: Debt Service
Liability and Gross Debt: EBITDA. The Group is also required to
maintain a percentage of its cash within a charging group of
relevant Group subsidiaries. Since entering into the facility
agreement and during 2012 SDL has complied with all of these
covenants. This facility was fully drawn in January 2012 to partly
fund the acquisition of Alterian, and remains fully drawn at
December 2012.
At the start of 2012, a new GBP7 million overdraft facility was
entered into to replace Alterian's overdraft facility. Pricing of
the new GBP7 million borrowing facility is a 1.00% margin on London
(or equivalent) Interbank Market rates according to the advance
date. GBP2.2 million was drawn on the acquisition date to replace
equivalent drawings under Alterian's old facility, and remained
drawn at December 2012. This facility was fully repaid in January
2013.
Taxation
SDL is a global business and as such the principal determinant
of the tax rate is primarily dependent on the territorial mix of
where operating profits are earned. A detailed analysis of the
taxation charge is included in note 4 to the accounts.
The headline effective tax charge for the year as a percentage
of profit before tax is 23.9% (2011: 23.8%).
In accordance with the provisions of IAS 38 the Group has
recognised deferred tax liabilities in respect of the non-tax
deductible amortisation of intangible assets acquired through
recent acquisitions. This deferred tax position has been adjusted
for the Alterian acquisition made in 2012. The movement of these
liabilities in the period has been reflected in the Income
Statement and the effect is to provide a tax benefit in future
Income Statements associated with the amortisation of those
intangible assets.
Due to the adoption of IFRS and the requirements of IAS 12 in
conjunction with IFRS 2, the schedule 23 tax credits available for
share options exercised, and deferred taxation on unexpired
options, has primarily been recorded in equity rather than the
Income Statement. The impact of this treatment in the current year
is to increase the headline effective tax rate by 2.9% (2011:
Decrease of 0.9%).
SDL plc
Consolidated INCOME STATEMENT
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